First Bank Failure Since 2017 - Customers May Lose Uninsured Deposits

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The Texas Department of Banking closed The Enloe State Bank on Friday according to an FDIC press release. The FDIC then arranged for Legend Bank, N.A. to assume the insured deposits. This is the first bank to fail since December 2017. The Enloe State Bank was small with only one branch, $36.7 million in assets and $31.3 million in deposits.

Between 2009 and 2017, it has been typical for the FDIC to arrange for another bank to acquire the failed bank and to assume all deposits, even those above the insurance limits. The FDIC did find another bank to acquire The Enloe State Bank, but the acquirer only agreed to assume insured deposits. This means that depositors who had over the insurance limits may lose those uninsured deposits. According to the FDIC, “there were approximately $500,000 that exceeded FDIC insurance limits.”

Here are the instructions for depositors that the FDIC stated in its FAQs for this failure:

YOUR INSURED DEPOSITS ARE SAFE! No one lost any insured money on deposit as a result of the closure of this bank. The insured balance in your deposit account(s) was transferred to Legend Bank, N.A.

If you had more than $250,000 in your account(s), or if the total of your related accounts exceeds $250,000, your accounts may require review by an FDIC Claims Agent. Please contact the FDIC Call Center at 888-408-4360 to schedule an appointment with an FDIC Claims Agent.

It appears the FDIC Claims Agent will decide if amounts over $250,000 qualify for coverage based on ownership categories. As most DA readers know, there are many ways to exceed $250,000 in FDIC insurance coverage. However, the responsibility falls on the depositor to make sure he or she qualifies for the additional coverage. Many factors can cause deposits over the $250,000 to not be insured. For example, Revocable Trust Accounts qualify for coverage of $250,000 per owner per unique beneficiary. However, if the beneficiary is deceased, the additional $250,000 of coverage is no longer available.

Customers with insured deposits don’t have to worry about loss of of their money, but they will have to worry about the reduction of interest rates on their CDs. Here’s what the FDIC describes in its FAQs:

Interest on deposits accrued through close of business on May 31, 2019, will be paid at your same rate, up to the insured amount. The Enloe State Bank’s rates will be reviewed by Legend Bank, N.A. and may be lowered; however, you will be notified in writing of any changes. You may withdraw funds from any transferred account that is not on hold, regardless of whether your interest rate changes, without an early withdrawal penalty until you enter into a new deposit agreement with Legend Bank, N.A.

Cause of the Failure

The Texas Department of Banking issued this press release which claims that fraud did cause the closure of The Enloe State Bank. Here’s the excerpt that mentions fraud:

Located 88 miles northeast of Dallas, Texas, The Enloe State Bank had deposits totaling approximately $31.3 million as of March 31, 2019. Commissioner Cooper stated, “This is the first Texas state-chartered bank to be closed since 2011. It is unfortunate that we are forced to close this bank which was chartered in 1928 due to insider abuse and fraud by former officers.”

It may take several months before we learn the details of the fraud and abuse. It took 11 months before the government provided the fraud details of the December 2017 bank closure. That fraud was allegedly perpetrated by the bank president and other employees of the small Chicago bank, Washington Federal Bank for Savings. The closure of Washington Federal had similarities with The Enloe State Bank closure. For both cases, the acquiring bank only agreed to assume the failed bank’s insured deposits and to purchase only a small percentage of the failed bank’s assets. There were several suspicious events that took place before the Washington Federal closure that pointed to fraud. Evidence of fraud was described in a Material Loss Review that was published by the Treasury Department on November 2018. The Review opened with this summary regarding the cause of the failure:

In brief, we found Washington Federal failed because of fraud in the bank’s loan activity perpetrated by bank employees. The fraudulent activity depleted the bank's capital, with the result that the bank was insolvent and was in an extremely unsafe or unsound condition to transact business.

Even without the Texas Department of Banking press release, there are signs pointing to fraud at The Enloe State Bank. For example, the Northeast Texas newspaper, The Paris News, reported that the fire department was called to the bank on May 11 (a Saturday), and “they found papers on a table in the conference room on fire.”

Fraud explains why the bank appeared financially healthy when looking only at the financial numbers. Bankrate gave the bank 5 stars, its highest safe and sound rating. We did a little better by only giving the bank a “B+” health grade. Factors including its small asset size prevented the bank from receiving higher grades of an “A+” or an “A”. Obviously, the financial numbers didn’t capture a serious problem with the bank that caused the regulators to shut it down. Our health grades at DepositAccounts are based on financial data from quarterly call reports that are provided by the FDIC.

This bank failure is an important reminder why everyone should make sure that their deposits (total of both principal and interest) are kept below the FDIC and NCUA insurance limits at each of their banks and credit unions.

Credit Union Liquidations and Conservatorships

Since the previous bank failure in December 2017, eight credit unions have been liquidated (seven in 2018 and one in 2019.) The most famous of these was Melrose Credit Union; it was liquidated last August. The Melrose liquidation was the result of Melrose’s high concentration of Taxi medallion loans, and the troubles of the New York City taxi industry as it tried to compete with the rise of ride-sharing app-based services like Uber. Another NYC credit union that had this problem was LOMTO. This credit union was liquidated a month after Melrose fell. Melrose was a large credit union with $1.1 billion of assets before it closed. LOMTO was also sizable with $156 million of assets. The other six credit unions that were liquidated were smaller, including two that were very small with assets under $1 million.

Besides being liquidated, a troubled credit union can be placed into conservatorship in which the NCUA takes over the management of the credit union with the goal of resolving the issues. If the issues cannot be resolved, the NCUA will either arrange for a merger of the conserved credit union into a healthy credit union or liquidate the credit union.

Large NYC Credit Union Hurt by CEO Fraud

A total of four credit unions have been placed into conservatorship and remain in conservatorship since December 2017 (two in 2018 and two in 2019.) The most noteworthy of these four credit unions is Municipal Credit Union (MCU) which was placed into conservatorship last May. MCU is a large New York City credit union which currently has $2.86 billion in assets.

Like the case of The Enloe State Bank, MCU’s troubles appear to have been the result of fraud. This week, the former CEO of MCU, Kam Wong, was “sentenced to 5½ years in prison for defrauding the non-profit financial institution of almost $10 million dollars” according to NYC newspaper, The Chief.

References:

Related Pages: bank health ratings

Comments


#1 - This comment has been removed for violating our comment policy.
radler2560
radler2560   |     |   Comment #4
Everyone needs to review their accounts coverage. The banks mangers are only concerned with protecting themselves and the employees are clueless from issues, not their customers. I recently pointed out to the management of a credit union that the category of "joint owner" of an account but not member of the credit union does not generating insurance coverage, according to the NCUA. Also "the way an account is ****le" determines how the amount of insurance is generated. Go to mycreditunion.gov for the document from the NUCA. CS reps are useless. They will tell you everything is fine, make up stories until the **** hits the fan.
Me
Me   |     |   Comment #5
Unfortunately you can't and never should rely on what is CS rep tells you. They are wrong a significant percentage of the time and won't be held accountable if something goes wrong.

Always verify the important factors are in writing that you have a copy of. It's up to you to understand how things work by verifying them on your own.

Banks are pretty safe, although not perfect. The only thing that's really safer is US Treasury securities. But they are lower yields and more hassle. As long as you stay within the FDIC / NCUA limits, you should be in pretty good shape unless the financial apocalypse comes in which case you want be safe anywhere. Even if you exceed those limits, the chances of a problem is pretty small if your account is in a large institution. Smaller ones are more risky.
Say What?
Say What?   |     |   Comment #8
Thanks for the heads-up.
I put a call in to the NCUA about insurance coverage for a non-member being on a joint account.
The website has something about requiring joint owners to have a signature card.
Like who does that anymore?
lou
lou   |     |   Comment #13
radler2560, only joint owners of POD accounts need to be members of the credit union to generate additional insurance. This is not an issue for joint owners without beneficiaries. BTW, this is not a requirement for FDIC banks.
SayWhat?
SayWhat?   |     |   Comment #14
Yup, it's yet another one of the credit union gotchas.
I called the NCUA and was told what lou describes above.
HOWEVER, when I asked the NCUA about the signature card requirement, I was told that a signature card must be on file at the credit union in order to receive the NCUA insurance coverage.
So, I pressed him by telling him that several CU's that I had joined online never required me to have a signature card on file to open an account.
His reply was that they should.
Sooooooo, I may have to send an email to the NCUA to get some clarification of this in writing.
Or, contact the CU's that I belong to and make sure that a signature card is on file.
Nothing
Nothing   |     |   Comment #15
Soooooooooooo the question for NCUA is "why/how can a so-called insured call itself insured by NCUA and not have the sign cards?" "And, what are you going to do about it"...and send a copy to the CU. (Or read it to the CU before you mail it...they may just act!) A CU should not falsely represent the requirements for insurance coverage...and the NCUA cannot ignore what is happening. And, I would confirm that "I" have coverage for my accounts unless advised otherwise in writing!!!
lou
lou   |     |   Comment #16
The signed signature cards for joint accounts is probably a relic of a time before the internet. Now everyone has an online procedure for joining a credit union which doesn't require a wet signature. I would think the NCUA would have to look at electronic records to determine the title of accounts regardless of what they are telling you, although it's troubling it's not explicitly spelled out in their guidelines.
lou
lou   |     |   Comment #17
This NCUA guidance seems to indicate that an e-signature is an acceptable alternative to a signed signature card. I have also found language that a signature is not required for share certificates.

https://nafcucomplianceblog.typepad.com/nafcu_weblog/e-sign-act/
SayWhat?
SayWhat?   |     |   Comment #18
Thanks for the link, lou.

The following section answered my question about how insurance is handled for a married couple where one is a member and the other is not (for California).

One of the things that amazes me

"All funds owned by an individual member (or, in a community property state, by the husband-wife community of which the individual is a member) and invested in one or more individual accounts are added together and insured to the $250,000 maximum."

With that issue settled, I started looking at how insurance for IRA's is handled (with regards to beneficiaries not being members). Apparently, if there is more than one beneficiary that is not a member of the credit union, it's not insured!

Here's what I found in Section E. How Are Trust Accounts and Retirement Accounts Insured? Electronic Code of Federal Regulations e-CFR data is current as of June 6, 2019 Title 12 ? Chapter VII ? Subchapter A ? Part 745

Example 2. Question: S invests funds in trust for A, B, C, D, and E. A, B, and C are members of the credit union, D, E and S are not. What is the insurance coverage?

Answer: This is an uninsurable account. Where there is more than one settlor or more than one beneficiary, all the settlors or all the beneficiaries must be members to establish this type of account. Since D, E and S are not members, this account cannot legally be established or insured.
Nothing
Nothing   |     |   Comment #19
If one does not have a current vested right to the funds...while should they be a member? Only need to be a member when vested and then try to withdraw?
lou
lou   |     |   Comment #20
Beneficiaries do NOT have to be members. The language you cite is for irrevocable accounts.
losingtrader
losingtrader   |     |   Comment #6
Note to self: When IRS comes for the audit and asks to see my records, do NOT tell the secretary, "Sweetheart, will you get the OTHER set of books?"
Roundtown
Roundtown   |     |   Comment #7
This site lists their overall rating at B+ with Texas Ratio of A+. https://www.depositaccounts.com/banks/enloe-state-bank.html

While this is a small bank looking at those ratings I doubt if I could have avoided being lulled into utilizing this institution had they had an attractive offer. Also, I find it kind of surprising that no bank could be found to pick up the modest amount of uninsured deposits. Depositor beware.
deplorable 1
deplorable 1   |     |   Comment #9
I see no reason not to stay within the FDIC/NCUA coverage limits. It's pretty easy to do once you know the rules. I know It's not likely that you will need it but I never thought I would need it either and ended up needing it twice. It's also worth mentioning to include all the interest you will accrue when keeping your accounts covered. I would have lost 3 years of interest on a 5 year CD had I not done this.
Me
Me   |     |   Comment #10
It's not difficult to stay within the limits unless you are dealing with very large sums of cash, and/or trust accounts. And the combination of those two can make managing the cash challengimg . It may have to be spread out over many banks, some banks don't allow any trust accounts at all, and some trusts will only qualify for no more than $250,000 of FDIC or NCUA coverage at each bank and there is no way to increase that.

So in that situation your options are limited, and you can't necessarily get the best rates. It's one of the downsides of trusts that the lawyers don't tell you about when they promote them.
Cracker
Cracker   |     |   Comment #11
I usually try to stay under the limit, but late last year Ally was running a special promotion where you could earn up to a $1000 bonus for increasing your balances with them. I did so, but it put me about $80K over the limit. I had a $100K CD which didn't mature until May (along with other CDs) and wasn't willing to break it. I put the new funds into a no penalty CD. Once the holding period was up I cashed it in and moved much of the money out.

I figured the risk of failure was low and because they're a sizeable bank that even if they did fail, depositors would be made whole regardless of their total balances if a new bank were to acquire them. The risk wasn't zero, but it was low enough that I felt comfortable doing it in the short term. I wouldn't have done so with a smaller, less well known bank.
deplorable 1
deplorable 1   |     |   Comment #12
There are exceptions to be sure where it may make sense to go above the limits at a large well known bank for a short period of time. I wouldn't do it with a 5-10 yr. CD though or a small one branch bank/CU.
AnnO
AnnO   |     |   Comment #21
“they found papers on a table in the conference room on fire.”

LOL, what a glaringly suspicious way to try to dispose of undesired documents. Papers don't just accidentally catch on fire laying on a table. Slipping them into the shred bin (they *did* have a shred bin, I hope??) would have avoided such attention. I wonder if this was the action of a reluctant employee trying to bring the bank under scrutiny without having to actually come out as a whistleblower, so when asked to destroy some documents, intentionally did it in the most alarming way they could.
david sun
david sun   |     |   Comment #22
Heavens, do you have some experience incite to these sorts of illegalities??
FDIC Man
FDIC Man   |     |   Comment #23
I've heard of incidents in which bank records were buried or thrown into a privy.
kcfield
kcfield   |     |   Comment #24
Let us keep focus on the other important aspect of this article: the failure of a major bank rating organization to capture the unstable financial status of Enloe State Bank. As Ken T. noted, Bankrate gave this organization its highest rating. Bankrate's specific comment was: "...Bankrate believes: "Enloe State Bank exhibited a superior condition, earning a full.5 stars for safety and soundness.
While of course it a customer's responsibility to make sure their deposits in banks/credit unions are fully insured; it is reasonable to trust a bank rating in an advisory capacity.
How did Bankrate fail in its analysis? How is it that the Weiss bank rating was more accurate--having given Enloe State Bank only a "C" rating as of 3/31/19? What are the differences in bank rating metrics that allowed for such a wide spread in ratings of a failing bank (Bankrate: A, vs. Deposit Accounts: B+; vs. Weiss: C)?
Finally, for the benefit of Deposit Accounts readers, perhaps it would be of value to offer at least two rating sources for each bank and credit union reviewed on the site (including Weiss as one rating source) so that our readers will have a fuller picture of each institution's safety.
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